Capital Appreciation Funds: Risks and Alternatives for Investors

Many investors choose capital appreciation funds in order to grow their accounts. However, this type of fund is not perfect by any means. Here are a few reasons that you might want to stay away from a capital appreciation fund.

1. Volatility

Perhaps the biggest reason to stay away from this type of fund is the volatility that it presents. These funds invest in growth stocks, which can move quickly. While this can provide you with nice returns in some situations, it can also make the losses come faster as well. In order to invest in this type of fund, you need a higher-than-average risk tolerance.

2. Tax Efficiency

Many of these capital appreciation funds will buy and sell stocks aggressively. They do this in order to try to find the next big winner in the stock market. However, this can negatively affect you by creating extra tax liability for you. When you buy and sell a lot of stocks, this can eat into your returns by forcing you to pay extra taxes.

3. No Dividends

With this type of fund, the fund managers will not typically invest in stocks that pay a dividend. This eliminates a potential source of income that you might get from other types of funds.